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Fair Lending:

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Today’s Panelists

Loretta KirkwoodVice President, ComplianceQuestSoft Corporation

Moderator

Brian Arnesen Marketing Manager

QuestSoft Corporation

Austin BrownAttorneySkadden, Arps, Slate, Meagher & Flom LLP

Austin K. Brown October 9, 2019

Fair Lending: How to Win Friends and Impress Examiners

Agenda

2 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

- Fair Lending Enforcement Activities

- Examination Hot Topics and Recent Findings

- CMS Takeaways

Redlining – DOJ Enforcement

3 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• United States v. First Merchants Bank, 1:19-cv-02365-JPH, (June 13, 2019 S.D. Ind.)- The Department of Justice alleged that First Merchants Bank had engaged

in lending discrimination by failing to meet the mortgage credit needs of majority-Black neighborhoods in Indianapolis.

- First settlement of DOJ fair lending investigation initiated during Trump presidency.

- Bank agreed to create a $1.12 million loan subsidy fund and devote $500,000 towards advertising, community outreach, and credit repair and education.

Redlining – Private Lawsuit

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• The Connecticut Fair Housing Center, Inc. v. Liberty Bank (D. Conn. filed Oct. 4, 2018)- Fair housing organization alleged that the bank had engaged in a pattern or

practice of redlining to restrict residential mortgage lending in majority-minority communities.

» The complaint alleged that the bank drew its CRA assessment area boundary to avoid racially diverse areas.

- The parties settled in February 2019 with the bank agreeing to provide over $15 million in community lending initiatives.

Redlining – CMS Takeaways

5 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• Analyze majority-minority and high-minority tract penetration on a periodic basis. Also consider analyzing majority-Black and majority-Hispanic penetration.

• Consider analyzing data both at the MSA level and the REMA level.- Some regulators have not adopted the REMA concept.

• Compare results to “peer” institutions.- Typically defined as institutions with 50%-200% of your applications or

originations.• Consider developing alternative peer sets in cases where your institution is

unique in the market.- New entrant, online lender, regulated by FDIC/OCC/FRB, etc.

• Document basis for alternative peer sets, results of analyses, and action steps.

Relationship Pricing and Competitive Offers

6 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• OCC Consent Order, Citibank N.A. (March 12, 2019)- OCC alleged that Citibank had violated the Fair Housing Act by failing to

offer relationship pricing discounts to all eligible mortgage customers.OCC alleged that this adversely affected borrowers on the basis of sex, race, nationality or color.

- Citibank agreed to pay a $25 million penalty and provide $24 million to approximately 24,000 customers.

Relationship Pricing and Competitive Offers – CMS Takeaways

7 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• Document relationship pricing and competitive offer standards.• Document instances where discounts are provided and specific reason for

discount.• Provide training to loan officers regarding eligibility for discounts.• Periodically review instances of discounts to assess consistency with policy.• Periodically review instances where discounts are not provided to confirm

accuracy.• Where appropriate, provide discounts retroactively.

Commercial Lending

8 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• Some regulators are performing fair lending analyses of underwriting and pricing of HMDA-reportable commercial loans.- Typically only where the loan is in the name of a natural person.

• Expectation that underwriting and pricing standards are clearly defined and objective.

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Commercial Lending – CMS Takeaways

• Consider establishing objective pricing and underwriting standards for commercial loans.

• Limit exceptions.• Periodically analyze commercial lending data to identify potential pricing and

underwriting disparities affecting prohibited basis groups.

10 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

Broker Compensation

• There has been a renewed focus by regulators on broker compensation at the wholesale-lender level.

• Regulators are aggregating compensation across brokers to identify potential disparities affecting prohibited basis groups.

11 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

The Aggregation Problem

Broker 1

0 bps

Broker 3

0 bps

Broker 6

0 bps

Broker 4

0 bps

Brokers Combined

10 bps

Broker 2

0 bps

Broker 5

0 bps

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Broker Compensation – CMS Takeaways

• Establish and document broker compensation limits• Periodically analyze broker compensation at the portfolio level, and within

individual brokers.• Depending on results, require business justification from broker for

compensation level.• As necessary and appropriate, consider adjusting permissible range of broker

compensation and individual broker compensation.• Document results of analyses and any remedial steps taken.

Digital Marketing

13 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• Marketing targeted to consumers in certain life stages or to certain demographic groups can present elevated fair lending risk.

• Examples:- Millennials- Young professionals- Retirees- Families with young children

• In some instances, such marketing practices may be viewed as appropriately targeting only those for whom a product is most suitable.

• However, it may also implicate provisions against discrimination on the basis of age, marital status, or familial status.

Case Study – Social Media Advertising Lawsuit (2019)

14 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• On March 28, 2019, HUD charged Facebook with violating the Fair Housing Act “by encouraging, enabling, and causing housing discrimination through the company’s advertising platform.”

• Allegations include:- Facebook “enables advertisers to exclude men or women from seeing an ad,” has a “search-box to

exclude people who do not speak a specific language from seeing an ad,” and has a “map tool to exclude people who live in a specified area from seeing an ad by drawing a red line around that area.”

- “Respondent also provides drop-down menus and search boxes to exclude or include (i.e., limit the audience of an ad exclusively to) people who share specified attributes.”

- “To generate a Lookalike Audience, Respondent considers sex and close proxies for the other protected classes. Such proxies can include which pages a user visits, which apps a user has, where a user goes during the day, and the purchases a user makes on and offline. Respondent alone, not the advertiser, determines which users will be included in a Lookalike Audience.”

- In the “ad delivery phase, . . . to decide which users will see an ad, Respondent considers sex and close proxies for the other protected classes.”

15 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• On March 27, 2018, the National Fair Housing Alliance (NFHA) and other groups filed a lawsuit against Facebook regarding the ability of advertisers to “include” or “exclude” recipients of real estate advertisements based on a pre-populated list of demographics, behaviors, and interests. Millennials- NFHA allegedly created a fictitious real estate company to access these

functions• Alleged examples include:

- “Parent with grade school kids”- “Interest” in» “English as a second language,”» “Telemundo”» “Disabled American Veteran”» “No kids”

Case Study – Social Media Advertising Lawsuit (2018)

16 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

• Advertisers could allegedly select certain markets to include or exclude including “corporate moms,” “stay-at-home moms,” “big-city moms,” “fit moms,” “soccer moms,” and “moms of grade school kids.”- “Men” could be allegedly be excluded as a demographic

• NFHA alleged that the advertising practices constitute illegal discrimination based on familial status, sex, disability, race, and national origin in violation of the Fair Housing Act and New York state law.

• Pursuant to March 2019 settlement, Facebook will pay $1,950,000 to plaintiffs and create a separate advertising portal for housing, employment, and credit ads with more limited targeting options.

Case Study – Social Media Advertising Lawsuit (2018)

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Digital Marketing Clusters

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Digital Marketing – CMS Takeaways

• Review digital marketing models, campaigns, and materials for fair lending risk.

• Document results of review of variables and strategy.• Exercise caution when using marketing inclusion or exclusion criteria or pre-

defined groups or clusters based on demographic factors that are tied to (or that may closely correlate with) a prohibited basis.

• Closely scrutinize digital marketing work performed by third parties by reviewing data sets and marketing model variables, among other things.

• Consider whether marketing practices in the aggregate are designed to reach a balanced, broad audience.

18 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

19 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesFair Lending: How to Win Friends and Impress Examiners

For More Information

Austin K. BrownAustin.Brown@skadden.com

(202) 371-7142

Loretta KirkwoodVice President, Compliance

Fair Lending: How to Win Friends and Impress Examiners

Wednesday, October 9, 2019

(800) 575-4632 www.QuestSoft.com © 2019 QuestSoft Corporation. All Rights Reserved.

• Preparation• Presentation• Connection• Expectation• Remediation

Examination

• Examination Request• Enforcement• Publications• New / Different

• Reviews• Off-Site• On-Site

Preparation

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Recent Exam Focus• HMDA Data Integrity• Method of Application• New Data = New Analysis

• Age • Credit Data• Business Purpose • Reverse Mortgages

Preparation

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• Message• Culture of Compliance• Responsible Conduct

• Evidence• Fair Lending CMS• Risk Assessments

Presentation

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(800) 575-4632 www.QuestSoft.com © 2019 QuestSoft Corporation. All Rights Reserved.

• Timeframe• Participants

• Examination Team• In-House Team

• Facilities• Interaction

• Face-to-Face• Email

Connection

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• Process• Additional Requests for Information• Verification of Facts Memo• Potential Action and Request for Response (PARR)

• Outcome• Matters Requiring Attention (MRA)• Matters Requiring Immediate Attention (MRIA)• Memorandum of Understanding (MOU)• Enforcement Action

Expectation

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• Internal • Policies / Procedures• Operational Controls• System Controls• Training / Education• Credit Needs Assessment

• Exam Related• Formal Responses• Follow-Up Reviews

Remediation

You can enter your question in the GoToWebinarapplication box in the “Questions” section.

If we can’t get to your question during this session, we will create a “Q&A” document with questions and answers for your review.

For information on products referenced

during this presentation, contact QuestSoft at

800-575-4632 option 1 or visit www.questsoft.com

Questions?

Austin BrownAttorneySkadden (202) 371-7142Austin.Brown@skadden.comhttps://www.skadden.com

Loretta KirkwoodVice President, ComplianceQuestSoft Corporation(949) 614-8957Loretta.Kirkwood@questsoft.comhttps://www.questsoft.com

Now it’s time to make compliance relaxingFor more information on solutions, call (800) 575-4632 option 1or visit us at www.QuestSoft.com

Thanks for joining us today!

You can download this presentation at:www.QuestSoft.com/FairLendingRisk2019